Qatar Navigation Q.P.S.C. (QNNS) Earnings Call Transcript & Summary

Good day, and welcome to the Milaha Qatar Navigation Q3 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to hand the conference over to Bobby Sarkar. Please go ahead.

Thank you, operator. Hello, everyone. This is Bobby Sarkar, Head of Research at QNB Financial Services. I wanted to welcome everyone to Qatar Navigation or Milaha's third quarter and 9 months 2021 results conference call. So on this call, we have Akram Iswaisi, who is the EVP, Finance and Investments at Milaha; and Sami Shtayyeh, who's the VP of Financial Planning and Analysis at Milaha. We will conduct this conference with management first reviewing the company's results followed by a Q&A. I would like to turn the call over now to Akram. Akram, please go ahead.

Thank you very much. Thank you, everyone, for joining Milaha's earnings call and your interest in the company. As usual, I will start with our consolidated financial results and then move on to the individual business segments. Sami will then go over our outlook for the year -- remainder of the year, and we'll end with questions and answers. The key highlights of our financial results. Milaha's operating revenues came in at QAR 2 billion for the first 9 months of 2021 compared with QAR 1.7 billion for the same period in 2020 for an increase of 18%. Operating profit came in at QAR 192 million for the first 9 months of 2021 compared with QAR 286 million for the same period in 2020 for a decrease of 33%. Net profit for the first 9 months of 2021 was QAR 654 million compared with QAR 384 million for the same period in 2020 for an increase of 71%. And lastly, our earnings per share were at QAR 0.58 for the first 9 months of 2021 compared with QAR 0.34 for the same period in 2020. Now getting into our business segments, starting with Maritime & Logistics. Operating revenue increased by QAR 143 million or 22%, and operating profit increased by QAR 70 million. Our container shipping unit drove most of the increase as it continues to benefit from a boost in global shipping rates. We also posted an increase in revenue in our logistics unit as volume and job disruption from last year due to COVID eased up. On the cost side, much of the drivers we discussed last quarter then remained the same. Variable expenses tied to revenue increased. Lead expenses increased due to additional vessels in our offshore unit and additional COVID-related expense costs. And lastly, we had a onetime claim-related provision that was recorded at the half year. At the nonoperating level, we had a drop of QAR 12 million that related to various adjustments. Overall, our net profit ended up 85% higher than the same period last year. In offshore, and moving on to offshore. Our operating revenue increased by QAR 201 million or 21%. Strong top line performance was more than offset by a higher increase in operating expenses, which negatively impacted our margins. The increased revenue came from the addition of both owned and chartered-in vessels and more diving and engineering services income. Expenses are slightly out of alignment with revenue, and most for the same reasons I explained last quarter, and they can be summarized in 4 main categories. Due to COVID restrictions and upgrades, our dry dockings are taking longer than usual, meaning assets can't return to employment and earn the same revenue as they did in the past. Although COVID-19 expenses have just recently started decreasing, they continue to have an impact on our operating results. Crew costs, in particular, have shot up as a result of excessive quarantine, and this has led to an increase in accommodation expenses. In addition, we reported QAR 16.4 million of tax provision that will not recur again to onetime adjustment. Lastly, our liftboat was employed off the coast of West Africa, but has been off hired since Q1, which negatively impacted the top line. Additionally, we transferred her to Qatar recently and incurred close to QAR 11 million in mobilization expenses. In short, she is not turning revenue, but we're still incurring operating expenses from the liftboat. QAR 257 million in lower impairments recorded versus 2020 boosted overall performance for the segment by 92%. Moving on to gas and petchem. Revenue dropped by QAR 40 million and operating profit dropped by QAR 51 million, primarily as a result of lower tanker rates versus 2020. Further, we now only have 1 tanker remaining after selling 2 tankers in June. The remaining tanker will be converted to an FSO starting later in the year and will be deployed on a long-term basically contract starting mid-2022, which should eliminate volatility in this segment. In the nonoperating level, income increased by QAR 22 million, with higher profit coming from our share of Nakilat, more than offsetting QAR 8 million in losses on the sale of 2 tankers in the second quarter. With respect to our trading segment, the increased revenue we recorded in Q1 and Q2 this year continued well into Q3, boosting our year-to-date revenue by QAR 122 million or 97% versus the same period last year. Bunker and heavy equipment sales drove most of the increase that helped improve the bottom line by QAR 2 million versus the same period in 2020. Lastly, the capital investment income decreased by QAR 24 million, with QAR 48 million in lower dividend income, partially offset by QAR 14 million in higher bond income and other income and QAR 10 million in reduced losses reported last year in our held-for-trading portfolio. Real estate revenue decreased by QAR 18 million, driven primarily by lower interest rental income. At the half year, marked real estate revenue was down QAR 22 million, but with income from our new villa compound that start in Q3, we've been able to chip away at the year-over-year reduction. At the nonoperating level, neither QAR 163 million impairment nor the QAR 82 million gain on sale of properties we reported last year recurred, which contributed heavily to the year-over-year improvement -- net improvement. And that wraps up the segments, and I will now turn it over to Sami to discuss our outlook.

Thank you, Akram. Starting with Maritime & Logistics. On the container shipping side, we expect the strong shipping rates that we have witnessed thus far this year to continue. In logistics, we expect a pickup in volumes and business, barring any unforeseen COVID-19 related closures. In offshore, where we'll obviously continue to feel the impact of the first 3 quarters on full year results. But for Q4, we're cautiously optimistic. In gas and petrochem, now that much of the volatility has been removed by virtue of selling of our 2 tankers, the majority of our business becomes fairly predictable due to the long-term nature of contracts. Trading sales are sporadic, but based on our pipeline, we believe we can carry forward with the growth from the first half. And lastly, with regards to capital on both the investment and real estate fronts, we don't foresee any major changes. With that, we'll now open up for the questions.

[Operator Instructions] We now have a question from [ Asian Bobby ] from Al Rayan Investments.

Just wondering what are your utilization rates currently and the warehouse facility the Milaha logistics warehouses? And how are you seeing that going forward? So that would be my first question, if you could. And then I'll ask my second question later.

Thanks for the question. We haven't disclosed the exact utilization in the past, but what we can tell you is utilization thus far this year is higher than last year.

And are you expecting to sort of maintain those levels going forward?

Listen, utilization, I mean, in terms of utilization, what we're focused on is the different types of utilization. Our business is supply chain logistics 3PL, so what we're looking is focusing on clients and -- that have high movement in inventory, and that's where we make the money. So if you talk about conventional storage which is more of a real estate play, you don't have a lot of turnover in inventory. So as a business, this is what we look for is very much focused on clients that have high movement inventory, because that's how we make money. The more we touch the inventory, the more we make money. So our inventory mix or I'll say client mix continues to change, and we're seeking to optimize the bottom line. And so don't continue to change until we can get that right mix of clientele.

Okay. Just on the liftboat, I know you mentioned that you brought it back in Qatar. Now what are the prospects of that? And how many -- what kind of expenses do you keep incurring on that?

Well, listen, this is a vessel. So you still have to keep a certain number of -- I mean, the certain operating costs that you have to incur. It's not full operating cost, but you still have to, because it's a vessel effectively, right? It's an operating unit. So from lubricants, from bunker, from staff, so there's still certain operating expenses that you have to have to incur to keep it going. And so there is still a plan right now or, let's say, under preparation of whether to deploy this or to sell it, and we have not reached the final conclusion of what we're going to do with it. And once we have a final decision, we'll share that.

[Operator Instructions]

This is Bobby again. I have a question, if I can. About the conversion of the tanker to the FSO, could you give us a sense of roughly what type of cost CapEx we are talking about there? What is the time line for the tankers going to be out of commission? And then when can we expect the FSO to start contributing? And then overall, what's your -- any color in terms of CapEx for the -- I guess, for next year?

Well, I mean, the vessel is going to be converted in -- it starts in December, and it should start generating revenue mid next year, June to July. And the CapEx should be minimal, because we already own the vessel. And so we don't expect significant CapEx investments on this. So we own the assets, so it's minor conversion that we're going to have to do, but it's going to take roughly 5 to 6 months.

It appears we have no further questions at this time. I'd like to turn the presentation back over -- pardon me, we do have a question now from Bijoy Joy from QIC.

A question on your offshore segment. So how should we think about this operating profit line? Once these costs related to COVID and these few one-off costs move out in the next couple of years, should we expect the operating profit to go beyond 2021 as your revenue has increased by almost 15% to 20% versus 2020.

Look, I mean, this year, we've been impacted by a number, let's say, I would say, one-offs. COVID has had -- obviously, there was additional cost that we had to spend to maintain or continue operations. And on top of that, we have extended dry docking that has delayed the deployment of vessels. So in our view, it kind of sets us up for a more -- better performance next year. So as we mentioned, we had VAT provision that we had to book. We had excessive dry docking compared to last year and prior years in general, have additional expenses related to COVID. And so a lot of these -- obviously, COVID will be with us for a while, and there's still going to be some expenses we have to spend related to COVID to continue to -- from a health and safety perspective. But generally speaking, we're optimistic that these are nonrecurring expenses, thus operating performance for offshore would look much better in the coming.

Okay. That was helpful. And another question on your Maritime & Logistics segment. So how should we think about this profitability from this particular segment on the operating level? It has been a loss-making segment for you for the last couple of years. Now that the rates have gone up, we yet to see a major benefit coming through. So how should we think about this segment? Although it should normalize over a period of time as the supply issues are resolved. But how -- what is your sense on this segment over the medium term?

Bijoy, this is Sami. Listen, on Maritime & Logistics, yes, definitely, shipping rates increased and benefited us. That -- there's no doubt about that. We were very transparent about that. Another point though that I'd like to make is also there's a lot of work being done behind the scenes on optimizing our network. We've taken tonnage out where it didn't make us money. We're getting into more agreements with third parties. We're doing a lot of cost optimization in Maritime & Logistics in particular. So there's a lot of work in Maritime & Logistics. It's not just about the shipping rates. Now the shipping rates, undoubtedly, they're going to start to come down. When that happens, whether it's in 2 years, whether it's in 18 months, whether it's in 12 months, not anyone's guess. So what we're trying to do at this point is do what we're trying to do, continue doing what we're trying to do, and that's optimize the network, looking into expansion into new areas. That's number one. On logistics, COVID really disrupted things in logistics last year. So to the extent we'll have hopefully some clean numbers next year without COVID, then that should also benefit us going forward. The warehouse, we've talked about the warehouse, focused on the warehouses, obviously, not just utilization, but utilization with the right types of clients turn inventory over. That's how -- the more you touch the cargo, the more money we make. So I think going forward, these are the things we're going to be continually focused on, stuff we control. The network optimization, growing the business, the warehouse utilization, that's stuff we control. Market rates, we're going to take it all we can, but we know that that's not going to last forever.

Let me add to that. I think there are mixed views on where rates are going to end up in the next couple of years. And I think there was a sense of optimism for 2021 that the impact of COVID will subside and then markets will open back up again. And yet here we are, we're still struggling with COVID. There are major supply chain disruptions globally, and you're seeing the major congestions at the major ports globally in China and the U.S. So I think from my view, this is my own view, I think those rates will continue on for the next couple of years. So if you're looking at the remainder of the year and next year, my view that rates will continue to be strong, so at least for the next couple of years. But after that, should potentially normalize and you're already seeing, let's say, new orders for new tonnage being placed, and that has gone up as well for delivery from 2 years from now. So I think for the next couple of years, we should continue to see good momentum in rates. And from our perspective, like Sami has mentioned, we are doing our part to optimize our network, looking at slot swap arrangements, upsize and downsize in tonnage. I think we built a fantastic team of capable shipping guys who are capable of reacting to the market. And so the reaction to the market, you have to be to react tactically to the market, because it's a very dynamic and fluid, the changes daily. So I think that's the way we're looking at it. Obviously, we do have -- we've recently worked with a long-term strategy for the business. And in the coming weeks, you will see more announcements on expansion in that segment. But again, it's not -- our view is not tactical, but it's backed by our long-term strategy in that segment and a good solid understanding of the dynamics of global trade and flow of goods. So we've done -- spent an extensive time on a containership strategy. And you will start seeing the fruits of that over the next few weeks. That said, it is quite competitive market right now with high pricing and significantly high valuation. So we will remain vigilant and opportunistic as we continue to execute on our strategy.

Yes, perfect. That was helpful. My final question is on the villa compound. So is it leased out now? Or do you expect it in Q4?

So as we've announced in our last earnings call, it's already leased on a 5-year contract. So it's already been leased out.

Okay. And so the contract has started?

Started already in August of this year.

As we have no further questions, I would like to turn the conference back to your presenters today for any additional or closing remarks.

Thank you, operator. This is Bobby Sarkar again. If we have no further questions, we can end the call for today. I want to thank Akram, and I want to thank Sami for taking the time to speak to investors, and we will pick this up next quarter. Thank you so much.

Thank you very much. I appreciate it. Happy weekend.

Thank you.

This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.